It is a very important question to ask on how to structure the purchase and sale of a property you intend to buy and sell with the intention of making a profit.
Many people look at this and decide to do this in their own names as a capital gain. As individuals, we all have a personal allowance for capital gains (currently around £12,000). However, if you are looking at doing a few of these types of projects rather then buying as an investment, from HMRC’s point of view they would look at this type of activity and potentially consider it to be a trading activity. This is quite an important difference when looking at the tax position. For tax purposes the following tax rates apply:
- Income Tax (used for trading activities) – 20%, 40% and 45%
- Capital Taxes (used for investment activities) – 10% (18%); 20% (28%)
Therefore, for all the activities we are talking about we would want them to be classified as capital transactions rather than income, as the tax rates are so much lower. The tax offices may overlook one project, but if you continue they will become more interested.
What is the best and right option?
The best option is to look at doing these types of projects through a specific developments or flipping company.
The reason a company is great in these circumstances is that the tax rates are a flat 19% on all profits made on the project. This is reducing to 17% in 2020. This tax rate is much lower than the personal rate. However, it should be noted that you do not get a personal allowance as a company so the whole profit is taxable rather than anything over Capital Gains Tax Allowance.
Our Advice: Be cautious and do it right so you don’t get caught out.
October 10th, 2019